What’s the world’s most powerful company, second in size as an “economic entity” only to the United States and China?
Good question, right? That’s why this ad from Nicholas Vardy caught my eye — he’s selling us on the potential for 127% returns if we invest in this company (assuming we subscribe to his Alpha Investor Letter, naturally), so I thought we should dig through the ad and figure out what he’s talking about.
Here’s some more of the intro:
“… the single-most-powerful company on the planet – according to my friend’s research.
“But it’s not one of the names who you might think.
“Not Apple, Microsoft, or GE.
“Which, in and of itself, is quite remarkable.
“In fact, it’s a company you’d probably never guess in a million years – even though – according to my friend’s formula – it has a value of $4.32 trillion!”
You probably already know that no company has yet reached a market value of one trillion dollars (remember all the fuss when Apple got close to $800 billion a few months back?), so is this really some secret, massive company that we don’t know about that should really be worth eight times as much as AAPL?
Something’s odd with that math, of course, but let’s see what it is. More from the ad:
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“It has a bigger impact on the global economy than Japan, Germany and the United Kingdom… Returned 1,981% to investors in the last 16 years… And looks even more profitable in the years ahead.
“In this report, discover this company’s name, along with 3 other ways to profit from it, offering gains as high as 127% in the next 12 months alone.”
Interesting… now we’re getting a little closer.
And Vardy does go into some detail regarding why this company is listed up at number three on the tally of global economic entities — he says he got this list from a lunch meeting with Patric Hale, who several years ago started compiling these kinds of lists (he used to run marketing for Euromoney, has written a couple books, and now manages The CEO Show). Here’s how Vardy describes the list:
“He created this list by combining information from four main sources:
- The nations with the biggest GDP according to the IMF.
- The top 500 global money managers ranked by assets according to the Towers Watson list.
- The fortune global 500 list of top public companies; ranked by company revenue.
- And the top 100 global banks according to their assets.
“From all of this data he created an algorithm that defined each of these entities’ economic power and influence on the global economy.
“And from there, he ranked them, calling his list, The Hale Index of the Top 500 Global Economic Entities.”
Ah, so it’s not that we’re talking about what a company should be worth, really, we’re just trying to rank different entities based on their economic impact or power.
That makes a bit more sense.
And it’s probably why none of those “fortune global 500” companies, ranked by company revenue, make the top ten — even the revenue of Wal-Mart, which posts higher sales than any other company in the world by a long shot, is still under $500 billion a year (the only companies who come close are Saudi Aramco, a couple Chinese oil companies, and a Chinese utility — though if you update the numbers to 2015 probably Samsung, the second place “real” company at $300 billion or so, even gets ahead of them).
So who is this mysterious company? More clues:
“The King of America’s Fortune 500
“It’s so powerful – that the company’s CEO wrote a letter to the top executives of the 500 largest publicly listed U.S. companies demanding they create more value for shareholders – or risk losing his firm’s support.
“That’s a lot of power.
“But here’s what really gets my adrenalin flowing.
“In the 16 years since it went public it handed investors an extraordinary 1,981% gain.”
So it’s not a particularly old company — only public since 1999 or 2000, and Vardy says it was started only about a decade before that.
Have some guesses? Me, too, but let’s check the rest of the clues to make sure…
“It invests in everything: stocks, bonds, sovereign debt, commodities, hedge-funds, ETF’s, you name it.
“At $4.3 trillion worth of economic might, it’s easily the biggest investment company in the world….
“… since summer’s end, this stock has racked up 20.25% gains…”
The chart he pulls to illustrate that ends around Thanksgiving, so the data’s a little bit old (I got the ad last month).
And then he provides some more clues, but ends up saying that it’s not necessarily just this company you should buy, but this company plus the three investments this secret company favors as it invests its huge portfolio.
Getting too complicated now? OK, step one is this secret “world’s most powerful company” — that’s quite clearly Blackrock (BLK), the giant asset management firm that most individual investors probably know best as the owner of the huge iShares ETF business.
And yes, Blackrock has a ludricrous number for their “assets under management” — and a pretty diversified business, including iShares, dozens of mutual funds, hedge funds, institutional money management… as well as services, like “risk management” and analysis for governments and other institutional investors. Second on the list of asset managers is Vanguard, and third is Fidelity, so you have to go down a ways (or start including other entities, like traditional banks) to find publicly traded “economic might” such as is wielded, at least theoretically or potentially, by Blackrock.
And Blackrock does use its bully pulpit — CEO Larry Fink is sometimes called the “world’s most important investor” and throws his weight around a bit in trying to push companies to be more investor-friendly, or management to think longer-term (they recently urged companies to stop issuing quarterly guidance, for example, which I think is a good idea — the quarterly “did they beat the numbers” game wastes a huge amount of energy).
Is it a good investment? Well, it certainly has been — the company has grown tremendously in its relatively short life, thanks partly to the rise of indexing (about 65% of their assets under management are effectively indexed, including iShares and their large indexed institutional portfolios). They’ve grown revenues at a faster clip than the market, and have continued to expand margins despite pressure on fees from investors — and until this year, when the dividend increase was quite a bit more muted, they had built up a strong record of very large dividend hikes (10% plus every year, with the exception of 2008/2009). Though they say they have diversified their offerings effectively to help provide stability, their performance is obviously going to be determined in no small part by their investment performance and their assets under management… if the investment performance falters (like, say if global markets fall 20%) then their AUM will drop, and most of their income is based on the management fees they charge as a percentage of AUM. About 2/3 of their income is from retail investors (iShares and traditional mutual funds, mostly), who pay higher expense ratios than institutions.
So the risks are probably pretty easy to understand — if markets fall, Blackrock will have lower AUM on which to earn fees…
and there is a risk that sometimes that loss of AUM snowballs, with falling markets causing people to pull money out of investments, thereby lowering AUM even faster. It’s true that there’s some stability in the assets, since often market forces will force you not to put your money under the mattress but to instead move some money from stocks to bonds, and Blackrock can earn fees on your fixed income investments as well as on your stock index funds.
On top of that is probably the other major risk: Competition. Blackrock, Fidelity, State Street, Vanguard and other major money managers are in a constant battle to undercut each other on fees, particularly for index funds that are effectively commoditized, and bring in more assets. You don’t want to overstate the impact of this, since fee deflation has been a reality for a decade and Blackrock has done just fine, but several of their major competitors (notably Vanguard, which is the strongest force for fee-cutting in the market), are not publicly traded and don’t face the same profit motive as Blackrock (Vanguard is owned by its investors, Fidelity is privately owned, the others are public but are not as much “pure play” asset managers as Blackrock is). There’s an interesting piece on Blackrock from Morningstar here if you want more info about the role they play in the marketplace.
But Vardy said we had some specific investments that Blackrock likes, and he thinks we should buy those, too — so what are they?
Well, this should all come with a grain of salt — Blackrock does have an “outlook,” generated by their many asset managers and analysts and presumably added to by top management, and they publish their views regularly for free (in lots of different ways, but one example is their monthly Investment Directions publication, February’s is here, and they also provide an annual outlook — 2016’s is here) and probably offer much more detailed global analysis to paying customers. I don’t know if they’re any more accurate than anyone else in predicting the markets, but they certainly have a lot of insight into what investors are doing because so many investors trust them with their capital.
So what are the three other investments, apparently favored by Blackrock in some way, that Vardy thinks we should consider? Thanks to its massive size and huge indexing reach, Blackrock is the among the largest couple investors in probably at least half of the S&P 500 companies… but Vardy this time is talking not about companies, but about countries.
More from the ad:
“How to Play the Most Powerful Company in the World For Life-Changing Gains.
“In just a few minutes you could be reading this report… and finding out the company’s name and ticker symbol.
“But that’s not the only thing you’ll find in this special report.
“I’ve also included the names and ticker symbols of the three investments I told you about earlier…
“Plays you can make today that let you invest alongside the most powerful company in the world…
“To pull down profits as high as 127% in the next 12 months alone!
“How can I be so sure of gains like that in the next year? Because, not only did my own research identify these plays as the place to be in the next year…
“They’re the same investments identified by the experts at the most powerful company in the world… using their industry-leading technology.
“So all you have to do to profit is…
“Piggyback on What the Experts Are Investing In Today.”
OK… so what is it that Vardy thinks Blackrock is favoring today?
“Financial Force Play #1:
“Accumulate Wealth from the New ‘Asian Miracle’ Story
“The first one is a play that’s off the radar of most investors.
“It covers a new rising economic power in the Pacific Ocean that I call the ‘Asian Miracle.’ It’s not Japan, it’s not China, and it’s not Singapore….
“94.6% literacy rate – one of the highest in the world
“350,000 new graduates from this country entering the work force….
“This nation has practically replaced India as one of the best sources for call centers.
“Its government debt is now relatively low – just 40.1% of GDP… its unemployment rate is at just 6.5%.
“And the nation’s GDP growth rate beats the U.S.’s nearly three times over….
“And 2016 is an election year for this nation. That’s important because – according to Barron’s – its market typically skyrockets 25% after an election is held….
“Barron’s goes on to mention that a stronger U.S. dollar, economy, and higher interest rates along with lower commodity prices plus slower Chinese growth will prove to be a shot in the arm for this nation’s economy.
“Altogether, now’s the perfect time to ride this nation’s economic coattails.
“And I’ve found the perfect way to do so…”
Hoozat? That’s The Philippines. So what is that “perfect way” to invest in that country? Presumably it would be Blackrock’s own product, the iShares MSCI Philippines index fund (EPHE).
The Philippines is growing more quickly than many of its neighbors, has close ties to the US, and is a major call center location now (it reportedly moved ahead of India in business process outsourcing for US companies seven or eight years ago, this is not a brand new development). The big telecom company in The Philippines, Philippine Long Distance Telephone (PHI), was a big favorite of investors for many years as a way to get exposure to the country through an ADR a decade ago, with a nice yield and solid growth, but EPHE was introduced back in 2010 and took most of that attention. There aren’t any other substantial Philippines ETFs.
And I don’t know that slower Chinese growth will be a shot in the arm (as of a few years ago, at least, China was the main export market for The Philippines, mostly electronic components), but the impact of a Chinese slowdown might be more muted for The Philippines than it is for Taiwan, Thailand or Vietnam, I suppose. It’s hard to say with a straight face that any of the smaller countries in Asia and Oceania will thrive if China falters — that’s a little bit like saying Mexico and Canada will boom if the US slows… possible, but not all that likely.
“Financial Force Play #2:
“War-Torn Island’s Bounce-Back Delivers Windfall Profits
“Most people would never guess that one European nation with a history of civil war and discord could ever become an investment-rich opportunity.
“But here we are… today, this country’s celebrated as Europe’s economic success story.
“However, its gradual climb began over 20 years ago – in the 90’s when a high-tech boom kick-started the country’s financial status…”
We’re also told that boom flamed out in a property bubble that popped (sound familiar?), but the economy was re-ignited by corporate tax cuts, personal tax increases, government spending cuts, and some bailout cash from the EU… sound familiar?
Yes, this is Ireland. Vardy has touted the Republic of Ireland before, mostly in relation to the big wave of pharmaceutical onshoring because of low tax rates, but just about every large multinational tries to funnel a lot of at least its European business through Ireland’s low-tax regime. What’s the investment he’s touting now? According to the chart he shows to illustrate the tease, it must be the iShares Ireland Capped ETF (EIRL), though he’s mistaken in saying that “since last year, shares have gone from $17.23 to $39.17.” They have indeed gone from $17.23 to above $40 for a while in recent months, but the $17 lows were in 2011. He quotes an optimistic story about “Play #2” from The Guardian, you can see that original article here if you’re curious.
And… one more?
“Financial Force Play #3:
“This ‘Cold War Battlefield’ Is Set to Deliver a Profit-Spree
“For decades this European nation was an espionage dueling spot for agents of the U.S., U.K., and Soviet intelligence agencies.
“It was where a massive Red Army tank blitz was expected should World War III start.
“But with the fall of the U.S.S.R., the people of this nation shook free from the Cold War and became free to chart their own course…
“To unlock their talent. That’s resulted in this country giving rise to 104 Nobel Prize winners.
“Not to mention the country becoming a business powerhouse and one of the U.S.’s top trading partners.”
Whoever could it be? This is, as you’ve no doubt imagined, good old Germany, the engine of Europe and perennially one of the world’s largest exporters. Certainly Germany’s export-led economy has benefited from the falling Euro — at least the companies that primarily export to the US and, to a lesser extent, China — but that hasn’t kept German stocks from falling over the past six months or so.
Which play on Germany is Vardy hinting at here? He doesn’t get very specific, I’m afraid, so I’m not certain about whether he’s pitching the plain vanilla iShares Germany ETF (EWG) or the newer iShares Germany Currency-Hedged ETF (HEWG). Currency hedging in ETFs became popular a couple years ago, with WisdomTree really pioneering the concept with the Japan Hedged Currency and European Hedged Currency ETFs — and yes, WisdomTree has a Germany hedged ETF as well, ticker DXGE (as does Deutsche Bank, theirs is DBGR). Each uses a slightly different index, so they don’t all track identically — but all of the currency hedged Germany ETFs have beaten the “normal” Germany ETF over the past year (and much more dramatically over the past two years, since that brings in the more substantial era of Euro collapse). I suspect that Vardy is probably recommending HEWG, since he wrote about it as his “#1 Bet on Investing on Europe” close to a year ago (the euro has stayed pretty stable during that time, all the Germany ETFs are down 16-18%).
Which of those would you take a gander at? Of those three I’d be most inclined to nibble on Germany, and would probably choose one of the currency-hedged ETFs since I expect we’ll probably still see the Euro come down a bit more (though I do think that the biggest gains from the falling Euro are probably past). The Philippines does present an interesting option if China stabilizes — that market is still a bit expensive for my taste, with the EPHE trading at a PE of 16 or so and with a low dividend yield, but maybe worth watching. I don’t own any of those ETFs currently, nor do I own shares of Blackrock (though until fairly recently I had a good position in PNC Financial Warrants, and PNC owns about a quarter of Blackrock — one of the reasons PNC stands out for me as an appealing regional bank, though I no longer own shares).
It’s not my money, though, it’s yours — so what do you think? Let us know with a comment below.